Know Your Finances

Posted by Ellen Le on April 24, 2009

The changing rules and regulations for individual retirement plans may be only slightly less complex than sending a man to Mars. At least with Mars we can have fun imagining luscious red soil and possible extraterrestrial life! Many people feel considerably less enthusiastic when it comes to figuring out the best retirement plan to contribute to in any given year. I get excited about it because tax-deferred asset growth is a wonderful thing. A tax-deferred pot of money grows larger than a taxable pot and, if you have the cash to save for your retirement and you qualify to make a contribution, it’s a darn shame not to. All of the dollar amounts I refer to in this article are for the 2009 tax year.

Here is a general comparison between the Traditional and Roth IRAs:

TRADITIONAL IRA & ROTH IRA COMPARISON
                                                             Traditional IRA        Roth IRA
Maximum annual contribution        $5,000 or $6,000        $5,000 or $6,000
Tax deductible contribution                          Possible        Never
Tax deferred growth                                             Yes        Yes
Tax free withdrawals          No         Yes
Minimum holding period       No         Yes - 5 years
Maximum contribution age                                 Yes - 70.5        No
Require minimum distributions                           Yes - 70.5        No
Early withdrawal tax penalty                              Possible        Possible
Retirement withdrawals                                        Yes        Yes
First time home buyer withdrawals                       Yes        Yes
Higher education withdrawals                               Yes        Yes


If you have earned income you can contribute each year to a Traditional IRA, or Rollover IRA, or possibly to a Roth IRA. A Rollover IRA is the same as a Traditional IRA; it serves to receive assets from a qualified plan, typically from a 401K plan. You can contribute as much as $5,000 (if you are 49 years or younger) or $6,000 (if you are 50 years or older), but you cannot contribute more than you earn. Also, if you are married and file jointly, you or your spouse can contribute for the non-working spouse as long as the working spouse’s earnings are at least the total contributed amount.

The special benefit of the Roth IRA over the Traditional IRA is that you contribute with after-tax dollars and NEVER pay taxes again. Also, you are never forced to withdraw money as you are with the Traditional IRA at age 70.5. You can’t contribute to the Roth if you earn more than $166,000 (married and filing jointly) or $120,000 (single filer). If you earn less, take advantage of it! If you earn too much to contribute to a Roth, look to the Traditional IRA instead.

With the Traditional IRA, you may or may not be contributing with pre-tax dollars (it depends on your income level and whether or not you participate in a retirement plan at work (usually a 401 k or 403 b plan). Plus, you must pay taxes on the Traditional IRA at the time you withdraw money.

There is a lot of detail, to much for the length of this article, about Traditional IRA partial and full deductions based on income tax filing status, income level, and participation in employer plans. Be aware, though, that if you are married and filing jointly, participate in an employer plan, and earn less than $85,000, you can deduct the entire contribution. If you are married and filing jointly, and do NOT participate in an employer plan, you can deduct your entire contribution no matter how much money you earn. Perhaps by the time we colonize Mars in the year ???, we will have a simpler structure to work with.

Conversions aren’t always religious!
Finally, you may be able to convert your Traditional IRA to a Roth IRA. It doesn’t make sense for everyone to convert since you have to pay taxes on all of the pre-tax contributions and any portfolio gains. But for some people, typically those who will not be withdrawing assets for at least 15 to 20 years (the portfolio needs time to recoup the taxes you pay), it makes a whole lot of sense to convert. After this year anyone can convert, no matter how much money they earn.

Of course there are many other important details to consider, but I want to urge you to contemplate investing your money in an individual retirement vehicle before investing in a taxable account. You can invest in all the same things in a retirement account as you can in a taxable account, for example, CDs, stocks, bonds, mutual funds, and exchange traded funds. Given the fragility of the investment world lately, the state of the economy, our longer lifespans, and the questionable state of the Social Security system, it behooves us to spend the extra time getting the most bang for our bucks!

Having said that…remember to talk to your investment advisor and accountant about the best strategy for you. A good advisor can number-crunch a variety of customized scenarios for you to determine what makes the most sense for your specific retirement plan. Depending upon your age and unique financial situation, it may in fact not be wise to invest in either of a Traditional or Roth IRA.

I look forward to receiving your questions about anything related to investments, retirement planning, or the economy. Send them to: ellen@ascendcapmgt.com and write “Chadds Ford Live” in the subject line.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.